How to Finance a Rental Property

Buying a rental property is a smart way to produce a steady and healthy stream of passive income; however, becoming a landlord takes a certain sum of cash to get started. As you work diligently to expand and diversify your real estate portfolio, sometimes, it might be challenging to find suitable funding for your next rental property.

While it is true that it has become more difficult to arrange financing for your rental property these days, for individuals with sufficient income and decent credit scores, there is still a lot of money available to borrow. The conventional route to purchasing a rental property involves saving money for a down payment and then getting a mortgage in order to cover the rest. However, the good news is that it is not the only path and you have other options.

Here are some great ways to finance your next investment property.

1. Private Funding

Many lenders in the market are willing to provide buyers private financing with an interest (secured) in the property, which is very similar to conventional mortgage lending. This means of funding can be an excellent source if you are looking to expand your real estate portfolio. The great thing about private lending is that the process can be quicker compared to a traditional mortgage financing process.

However, you may have to pay slightly higher interest rates on this source of funding, but do not let that keep you from considering this convenient option.

Keep in mind that if the rental property is a financially feasible investment––that is, if the potential rental income from the property has positive cash flow and there’s also the possibility of appreciation––you can avail private funding in the short-term until traditional financing is available.

2. Online Mortgage Providers

This is another great source of funding. Getting a rental property loan from a reliable online mortgage provider could be more convenient and hassle-free than getting one from a conventional mortgage provider. Online loan marketplaces, such as LendingTree, Quicken Loans, LoanDepot, and Rocket Mortgage are replacing the most convenient lending solutions. There are several reasons driving this trend.

For example, with an online property lender, you do not need to physically visit a bank in order to get a loan since the whole process happens online on your laptop or mobile device. All you have to do is fill out some information and paperwork, compare your loan options, and get set up with some of the best partners for your plans. Another great thing is that some of these property lenders do not stipulate debt-to-income (DTI) and income requirements, which is immensely beneficial for borrowers who otherwise may not qualify for a loan.

3. Seller Financing

It is worth mentioning that seller financing is an excellent option that usually works well when you can’t secure a loan for your property from a bank or other conventional lending source. Seller financing involves getting a property loan from the individual you are purchasing the rental property from.

Also, note that in many cases, if the property seller can lend you the funds, it is easier compared to getting a property loan from a bank or credit union. These types of deals tend to work in many scenarios. For example, the seller may finance either the full purchase price or the down payment. The seller can be another rental property investor — or they may be the live-in owner of the property. However, keep in mind that if you want to pursue seller financing to buy a rental property, you need to have a smart game plan.

This is because approaching a property seller without any details will not inspire their confidence. You should have specific contract terms and conditions written out and prepared to be executed. And no matter the amount of experience you have, you must get all the terms of the property loan in writing.

4. Tap into Home Equity

You can draw on your home equity, either via a home equity loan, cash-out refinance, or HELOC, to finance your next rental property. It is a great way to secure a rental investment property. A HELOC applies when the property lender uses a current property that you own as security for your loan. With a HELOC, you may borrow money against the home equity just like you would with a credit card. In this case, the monthly payments are usually interest-only.

In a majority of cases, you can borrow up to 80 percent of the home’s equity value to purchase a second property. A cash-out refinance, in contrast, comes with a fixed-rate; however, it can extend the term of your existing mortgage.

Final Thoughts

While investing your money in a rental property is a risky venture, it offers the potential for a huge payoff. You have several options to fund your next rental property. Finding the funds to take advantage of a real estate investment opportunity does not have to be an obstacle as long as you know where to look.

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